Contributed property in the hands of a partnership.

• Author: Ellentuck, Albert B.

A PARTNERSHIP THAT RECEIVES CONTRIBUTIONS of property must establish the basis, the holding period, and the character of the property in the hands of the partnership, and also determine available accounting and depreciation methods.

Determining the Basis of Contributed Property to the Partnership

Sec. 723 provides that a partnership's basis in contributed property is generally the contributing partner's adjusted tax basis in the property, plus any gain the partner recognizes under the investment company rules. In addition, if the contributing partner recognizes gain from the relief of liabilities, the partnership may be entitled to a basis step-up. The partnership also receives a higher basis if gain is recognized under the disguised-sale rules or under the Sec. 704(c) rules for contributed property later distributed to another partner. If contributed property has a built-in loss, the built-in loss is taken into account only in determining the amount of items allocated to the contributing partner. Except as provided in regulations, in determining the amount of items allocated to the other partners, the basis of the contributed property in the hands of the partnership is its fair market value (FMV) at the time of contribution (Sec. 704(c)(1)(C)).

Note: The IRS released a coordinated issue paper in March 2010 addressing the use of distressed assets to shift economic losses from a tax-indifferent party (usually a foreign taxpayer) to a U.S. taxpayer. These types of transactions involve the transfer of high-basis, low-value assets to a partnership. The coordinated issue paper states that the contribution of a worthless asset to a partnership does not give rise to any carryover basis; the partnership has no adjusted basis in any asset that was worthless at the time of contribution.

Determining Partner's Holding Period in Partnership Interests Acquired From Property Contributions

Sec. 1223(2) provides that the partnership's holding period for contributed assets includes the holding period of the assets in the hands of the contributing partner. This tacking-on concept applies whether or not the contributing partner recognizes any gain on the contribution because of a net reduction in liabilities. However, if the contribution is fully taxable because of the investment company rule of Sec. 721(b), the partnership's holding period in the contributed securities begins on the contribution date. Similarly, if the contributing partner recognizes gain under the disguised-sale rules, the holding period of the property deemed purchased begins on the contribution date.

A partner's holding period for a partnership interest received in exchange for a contribution of property depends on the character of the contributed property. If the contributed property is a capital asset or property used in a trade or business (within the meaning of Sec. 1231) immediately prior to the contribution, the partner's holding period for the partnership interest includes the holding period of the contributed property...